Dollar drops after U.S. data, ECB rate decision

European Central Bank holds key interest rate at 3.25%

By

WanfengZhou

NEW YORK (MarketWatch) -- The dollar fell modestly against the euro and yen Thursday after government reports showed lower than expected U.S. productivity growth and factory orders and as comments from the European Central Bank chief reinforced expectations interest rates in the eurozone will rise in December.

The Frankfurt-based ECB on Thursday held its key interest rates steady at 3.25%. ECB chief Jean-Claude Trichet said at a press conference that the central bank will exercise "strong vigilance" toward inflation and that it remains warranted to further withdraw accommodation. Trichet, however, declined to comment on the ECB's 2007 interest-rate stance. See full story.

The ECB "delivered a hawkish press conference that paves the way for another 0.25 percentage point rate hike in December," said Natascha Gewaltig, an economist at research firm Action Economics. "We continue to expect further rate hikes in 2007, but probably with a slightly longer gap than the current two-month cycle."

Late in New York, the dollar was quoted at 117.09 yen, compared with 117.05 yen late Wednesday. The euro changed hands at $1.2776, compared with $1.2754.

The British pound traded at $1.9083, compared with $1.9084. The dollar was at 1.2447, compared with 1.2455 francs.

On the U.S. data front, the productivity growth of U.S. nonfarm businesses fell to 0% in the third quarter, the Labor Department said. Unit labor costs -- a key gauge of inflationary pressures stemming from a tight labor market -- increased at an annualized rate of 3.8%.

Economists polled by MarketWatch had expected a 1.1% increase in productivity and a 3.4% gain in unit labor costs. See full story.

A separate Labor Department report showed the number of workers filing for state unemployment benefits rose by 18,000 to a 16-week high of 327,000 last week. See full story.

Elsewhere, the Commerce Department said U.S. factory orders rose 2.1% in September, lower than expectations of a 3.8% increase. Taking out transportation orders, factory orders fell by 2.4% in September.

Michael Carey, chief economist of North America at Calyon Corporate and Investment Bank, said the productivity growth report suggested the Fed will likely worry over the inflationary potential from rising labor costs.

However, "the simultaneously released rise in initial claims and weakness in other activity indicators, such as the ISM index, point to slower growth ahead, which will act to slow inflation," he said.

There was limited market reaction to a speech by Dallas Fed President Richard Fisher. The central banker said an examination of the Dallas Fed's inflation measures suggests that the worst news on consumer inflation may be over. See Fed coverage.

"It is possible that the trend in overall consumer inflation has peaked and is finally heading lower," Fisher said. But he also said the overall inflation trend remains above his "comfort zone."

The greenback tumbled to five-week lows versus the euro and yen before recovering Wednesday after the Institute for Supply Management said factory activity in the U.S. decelerated in October for the third straight month to its weakest level since June 2003.

Traders await the October nonfarm payrolls report, due out Friday at 8:30 a.m. Eastern. Economists polled by MarketWatch expect the economy to add 125,000 jobs in October.

Europe-wide, data released earlier Thursday showed that manufacturing sentiment rose to a three-month high. Sentiment in France, Italy and Spain all rose.

But unemployment fell in Germany to its lowest level in two and a half years, falling to 10.4% in October from 10.6%, according to data released Thursday.

Elsewhere, the yen rose after Hiroshi Watanabe, Japan's Vice Finance Minister, said the yen should not weaken as the world's second-largest economy has pulled out of bad times and is expanding.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.